W2 Payroll
We will begin with W2 because it is most common, chances are the majority if not all the jobs you’ve had in the past used W2.
When a person is paid on the form W-2, the employer will automatically withhold and pay all of the necessary employee income taxes which are required by the IRS. The applicable taxes include: Federal Income Tax, State Income Tax, and FICA (Social Security and Medicare). In addition, the employer will pay all of the necessary employer taxes. These taxes shall include: FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and SUI (State Unemployment Tax).
In most cases, the employer will provide the equipment and office space you will need. You may be eligible for some or all of the benefits your employer may offer to permanent employees such as medical, life, and disability insurance; pension plans; sick days; paid holidays, etc.


1099 Payroll
Working on a 1099 basis actually means that you are working as a true Independent Contractor under the IRS rules. You work on a 1099 basis when you are self employed such as a sole proprietor or as a corporation. Your clients will report the monies they pay you to the IRS on a 1099 form. Your clients will typically contract with you to work on a specific project. You should have a written contract with each client that will outline the work you will perform, the fees an or cost the client will pay, and how the client will pay you. You will forward invoices to the client according to the contract terms.


Hi softballkid,
I guess the main advantage is that you'll have a job!   8-)   With W-2
status, you will be an employee of the agency rather than being self
employed as you are with 1099 status.   The difference will be that
you'll find things a bit easier tax-wise (taxes will be taken out of
your paycheck and the agency will pay half of your social security
tax), but you will lose your independence and the ability to negotiate
your own terms.
What is the difference between an Independent Contractor and an Employee?
"The difference primarily affects tax status. An independent
contractor (IC) is not an employee of anyone but himself (self
employed) but instead invoices and is paid by the client just as the
client would pay any contractor. The client reports the payment to the
IRS on a form 1099 but does not withhold taxes or pay social security
tax. Other laws and regulations concerning employment, such as
wage-hour (requiring overtime for certain employees) and workers
compensation do not apply."
"A contract employee is an employee of a temporary service agency.
That agency reports the employee's earnings to the IRS on a form W-2,
withholds Federal and state income tax, and pays the employer's share
of the social security tax. All federal and state employment laws
apply. The employee is not an employee of the client, for whom he
performs his services. That client actually is a client of the
temporary services agency."
http://www.jashaw.com/solo/solo1.html
"Often the decision of 1099 or W2 status is based on the circumstances
of the work. If you are going to work directly for a company to
complete a project, and are to be paid a fixed amount for the project,
then there is usually no choice but 1099 status. The company will
issue a purchase order to you, you will complete the work and invoice
the company.
On the other hand, if you are a contract employee working through a
temp agency the agency may not handle 1099 pay, or requires that you
be incorporated to avoid a W-2."
http://www.jashaw.com/solo/solo1.html
1099 or W-2 Which Plan is for Me?
Characteristics of a W2 Employee
"You work as a W2 employee when your client or an agency places you on
their payroll, usually to work on a specific project. The client or
agency reports your income to the IRS on a W2 form. As a W2 employee,
you receive a regular paycheck from which your employer withholds all
federal, state, and local taxes. You file regular state and federal
tax returns, just as you would if you were a permanent employee.
In most cases, the employer provides the equipment and office space
you need. You may be eligible for some or all of the benefits your
employer offers to permanent employees such as medical, life, and
disability insurance; pension plans; sick days; paid holidays, etc."
Characteristics of a 1099 Contractor
"Working on a 1099 basis means that you are working as a true
independent contractor under the IRS rules. You work on a 1099 basis
when you are in business for yourself as a sole proprietor or as a
corporation. Your clients report the money they pay you to the IRS on
a 1099 form. Your clients typically contract with you to work on a
specific project. You should have a written contract with each client
that delineates the work you will perform, the fees the client will
pay, and how the client will pay you. You will send invoices to the
client in accordance with the contract terms.
True independent contractors are responsible for tracking all business
expenses and income and for making quarterly federal and state income
tax payments."
http://ework.com/WSClassification.jsp


Advantages of 1099 status:
"The IC has more freedom to negotiate his terms of payment than an employee..."
"The IC does not have withholding tax deducted from his pay check..."
"An employer must also pay certain required benefits, such as workers
compensation insurance..."
Advantages of W-2 status:
"Working as an employee (contract or permanent, direct) also has
advantages. Taxes are taken out of each paycheck, and the employer
(for a contractor, the agency) pays the employer?s half of the social
security tax... For many people, this will eliminate the need to hire
an accountant or lawyer to prepare the taxes (although for a family
there may be other reasons to use a tax professional)."
http://www.jashaw.com/solo/solo1.html
A good way to determine the differences is to have a look a the THE
IRS CONTROL TEST ("an analytical tool for distinguishing employees
from independent contractors").
BEHAVIORAL CONTROL
"Instructions. If a company gives a worker instructions pertaining to
how the work gets done rather than simply to the end product, this is
evidence of an employer-employee relationship..."
"Training. Ongoing training about specific methods and procedures is
evidence of an employer-employee relationship."
FINANCIAL CONTROL
"Opportunity for profit or loss. The IRS considers the opportunity for
profit or loss to be the most significant test of whether a worker
maintains control over the economic aspects of his or her activities."
- Significant investment.
- Unreimbursed expenses.
- Services available to the relevant market.
RELATIONSHIP OF THE PARTIES
"Intent of the Parties/Written contracts. In determining the
relationship between a worker and a company, the IRS considers how the
written contract describes the intent of the parties involved.
- Benefits. If a company grants a worker employee benefits, such as
health insurance or paid vacation time, this is evidence of employee
status.
- Termination. Traditionally, the terms on which either party could
terminate the relationship played an important role in determining
whether a worker was an independent contractor or an employee."
- Ongoing Relationship. If a business and a worker enter into a
relationship with the understanding that it will be permanent or
indefinite, this is evidence of an employment relationship."
- Regular Business Activity. If a worker performs activities or
services that are "a key aspect of the regular business of the
company," this is evidence of an employment relationship."
http://ework.com/WSClassification.jsp
What is the difference between a Form W-2 and a Form 1099-MISC?
http://www.irs.gov/faqs/faq12-2.html
1099s and Taxes
"When a person is paid on the form, 1099-misc, all money earned by the
individual is paid on an untaxed basis. It is then the responsibility
of the individual to file and pay the appropriate taxes. These taxes
can be owed to Federal, State and Local governments. Workers
compensation and unemployment issues also must be addressed
independently."
W-2s and Taxes
"When a person is paid on the form W-2, the employer automatically
withholds and pays all of the necessary employee income taxes as
required by the IRS. These taxes include: Federal Income Tax, State
Income Tax, and FICA (Social Security and Medicare). In addition, the
employer will pay all of the necessary employer taxes. These taxes
include: FICA (Social Security and Medicare), FUTA (Federal
Unemployment Tax), and SUI (State Unemployment Tax)."
http://www.topechelon.com/employers/contracting_definition.htm
Making the Jump: Moving from Permanent to Contract Employment:
http://www.sage.org/resources/best.of/jump.mm
I hope this helps. If you have any questions, please post a
clarification request *before* closing/rating my answer and I'll be
happy to reply.
Thank you,
hummer